Federal Reserve survey sees slower growth in East and Midwest

WASHINGTON — The economy lost strength in late summer as factory production weakened in areas of the East Coast and Midwest. A survey the Federal Reserve released Wednesday found the slower growth spreading to more regions of the country.

Of the 12 regions the Fed tracks, economic activity slowed or was mixed in five — New York, Philadelphia, Richmond, Atlanta and Chicago. Activity elsewhere was described as modest or pointed to positive developments.

In the Fed’s previous survey in late July, only two regions — Atlanta and Chicago — had reported slower growth. Reasons for the soft spots varied.

In New York, retailers, especially those in New York City, said sales dropped. Factory production slowed, too. And, both the housing and commercial real-estate markets turned even softer. Philadelphia reported slower manufacturing and real-estate activity. But retailers’ revenue rose, which explained that region’s mixed picture.

But in Richmond, retail sales sputtered, some factories reported a slowdown in customer demand and real-estate markets remained soft. A similar trend was reported in Atlanta, where retail, manufacturing and real-estate activity all fell.

In Chicago, a weakening in manufacturing and construction activity accounted mainly for that region’s slower economic pace. Retail sales in that region rose, however. The overall U.S. economy was still growing in late summer, but there were “widespread signs of deceleration,” the Fed said.

The findings will figure into discussions when Fed Chairman Ben Bernanke and his colleagues meet next on Sept. 21. The Fed is sure to keep rates at record lows to bolster the economy. Bernanke has said the Fed is prepared to take additional steps — namely buying large amounts of government securities — if the economy seriously deteriorated. That would be aimed at driving down rates on mortgages and other loans to spur Americans to buy more and strengthen the economy.

“Bottom line: The Fed ... was surprisingly frank in describing an economy that is in the process of losing momentum,” said Brian Bethune, economist at IHS Global Insight. He said pressure is mounting on the Fed to take more action to help. “The ailing economy needs more oxygen pumped into it in order to nurse it through a critical phase of the recovery,” Bethune said.

At its August meeting, Bernanke persuaded all but one of his Fed colleagues to support a plan to buy a small amount of government securities to try to give the economy a boost. The Fed survey also found that five regions — St. Louis, Minneapolis, Kansas City, Dallas and San Francisco all reported modest growth. And two regions — Boston and Cleveland — reported improved economic activity.

All that helps explain why Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, voted against the Fed’s relief action in August. He says he thinks the national economy will keep growing and get through any soft patches without any extra help from the Fed.

But Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said in a speech Wednesday that he would have backed the Fed’s August action if he were a voting member this year. (He will be a voting member next year.) Kocherlakota struck an optimistic note that the U.S. economy will keep growing and avoid falling back into a recession. “I believe that a modest recovery is under way and is likely to continue,” he said.

Nationwide, consumers, while cautious, are continuing to spend to keep the economy expanding, the Fed survey said. Manufacturing is growing but at a slower pace than seen earlier this year.

Home sales weakened, which, in turn, has weighed on construction activity, the Fed said. And companies continue to be cautious about hiring full-time workers. Businesses in Philadelphia and Atlanta, for instance, reported relying instead on temporary and contract workers to meet any increases in customer demand.

The Fed’s region-by-region survey is based on information collected from the Fed’s 12 regional banks on or before Aug. 30. It provides a more intimate look at the overall economy than broad statistics.